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Wednesday, 04 July 2018 04:10
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Given PSU losses, sale value is not the most important parameter



In response to a question on why his government was not pursuing a more aggressive privatisation strategy, prime minister Narendra Modi replied that, while his government had cleared several strategic sales of loss-making PSUs—around 20 have been cleared—the reason why none had been sold so far was because “we do not want to make a sale where we will be accused of selling something for X amount when we could have got more”. While it is true the Opposition parties will generally try to portray any sale as an example of cronyism, the prime minister is being too cautious. For one, if there is a transparent bid, such allegations are completely baseless—indeed, if the government is hesitant to take decisions for fear of accusations being hurled at it, imagine the plight of PSU managers who have to take financial decisions every day.

But, more importantly, the prime minister needs to keep in mind that a loss avoided is, eventually, a gain. In the case of Air India, for example, one of the reasons why this newspaper has been advocating that the government write off all its debt—and not just half—is that the losses are so huge, just avoiding the losses is a big gain from privatisation. If Air India’s annual losses are to remain at around Rs5,000 crore for the next five years—they will rise to at least Rs 7,000 crore this year as oil prices are higher—that is Rs 25,000 crore in total or around Rs 20,800 crore in today’s value, assuming a 10% discount; losses at this level for 10 years mean a net present value of Rs 33,800 crore! The point is that, with companies like Air India or BSNL/MTNL—combined losses of the telecom PSUs rose from Rs6,807 crore in FY16 to Rs 7,734 crore in FY17—they have no credible revival plan without a massive layoff of staff; MTNL’s salary is 75% of turnover versus an industry average of around 4-5%. Getting rid of these white elephants for even free is a great saving, but, retaining them will cost more than even their annual losses. In the case of MTNL, since its spectrum expires next April, the government will have to spend Rs 9,500 crore to renew this; BSNL wants Rs 12,995 crore of 4G spectrum, also for free, as it has no money to pay for it. And, there is no guarantee that, after getting this largesse, the PSUs will perform any better.


Looked at another way, since this government has come to power, the share of PSUs in overall market capitalisation has contracted from 22.7% to 13.5%—that translates to a potential loss of Rs13.5 lakh crore. In other words, every day that the government holds on to PSUs means a loss in its potential value. If the prime minister kept this in mind, his main concern would be divesting PSUs at the earliest, not worrying about whether he could get a higher valuation at some date in the future.


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